Why First Uranium lost 25% of its value this week

Construction and engineering delays, cost escalations, a stronger rand than anticipated, lower uranium prices, and a surprise for investors from the uranium-gold miner.

JOHANNESBURG - 

First Uranium's year end results released on Wednesday this week saw investors react by taking the Toronto-quoted stock price down by more than 25%. First Uranium followed up by releasing commentary on the results on Thursday, where it detailed the differences in projected uranium and gold output, starting with the findings of a technical report dated April 2008, as updated in November 2008, and again in June this year. 

The First Uranium stock price is now 41% below its highs, compared to a weighted average of 38% for 117 uranium focused stocks listed around the world. 

The net story now for First Uranium is that projected uranium and gold production is down, particularly for 2010, but will rise strongly to higher levels after that. Construction and engineering delays, cost escalations, a stronger rand than anticipated, and lower uranium prices, have seen a number of fine tunings across Ezulwini and MWS, in South Africa. Amid some re-engineering, there is to be greater emphasis on gold production, and lesser emphasis on uranium output. 

Life-of-mine (LOM) uranium production at the Ezulwini mine is now projected at 18.3m lbs of uranium, a 15% gain on the earliest projection, while gold output is 11% higher, at 5.8m ounces. At the MWS operation, LOM uranium production is 13% down at 17.1m lbs, and gold production is up 5% to 2.1m ounces. 

Combining the two, group LOM uranium production is marginally down at 35.5m lbs, and gold production up 10% to 7.9m ounces. In the short to medium term, however, annual production figures have been reduced by some margin. Group uranium production for 2010 is now projected at 752,000 lbs, a 55% cut on the number projected in April 2008, while gold production anticipated is at 231,000 ounces, a 36% fall on the earlier number. These reductions erode First Uranium's returns on capital invested. 

On Wednesday this week, First Uranium president and CEO Gordon Miller stated: "While not yet recording positive cash flow and earnings, we are encouraged that our financial performance is headed in the right direction and reflects our status as a gold producer at both operations and that, with the start-up of uranium production, the majority of our capital expenditures at the Ezulwini Mine are now behind us. 

"We expect that operating profit and cash flow will benefit from the completion of the significant capital expenditure programs at the Ezulwini Mine in full year 2009, which ended 31 March 2009, and at MWS in full year 2010, which ends 31 March 2010". Based on its own assumptions and projections, First Uranium's total NPV (net present value) has decreased marginally from USD 1.565bn (as reported on 11 November 2008) to USD 1.482bn. 

First Uranium has been active in raising funds for its capital expenditures for some months. On 1 June it announced a bought deal offering of 15.25m shares at CAD 7.00 a share, to raise CAD 107m. On 11 February it announced a bought deal where it sold 20.5m shares at CAD 3.00 each to raise CAD 61.5m 

On 17 December First Uranium announced that it had received the initial USD 50m from Gold Wheaton, where the latter will buy 25% of the estimated 2.1m ounces of gold life-of-mine production from MWS. On 12 March 2009 First Uranium announced that it had received the balance payment of USD 75m from Gold Wheaton.

First Uranium is focusing on cash; it believes that the sequencing of construction, including deferral of construction of the third uranium plant module at MWS, will allow additional funding to be derived from future anticipated cash flows, which combined with existing cash, will enable it to finance the MWS capital needs without additional equity capital.

Due to the prevailing uranium price expectations, management plans to reconfigure the MWS plant design and change the mine plan to achieve about 91% of the previously planned life-of-mine uranium production, resulting, states First Uranium, "in a more efficient capital investment program and optimized cash flow profile".

First Uranium was initially spun out of Johannesburg listed Simmer & Jack, which still holds 41%% of First Uranium. Simmer & Jack is also building, and rebuilding mines, and recently bought one, Tau Lekoa, from AngloGold Ashanti for ZAR 600m. On 15 June 2009 Simmer & Jack raised ZAR 289m in a private placement. There was a prior issue on 5 March where it raised ZAR 110m; on 17 February Simmer & Jack announced a bought deal financing where it sold 19.6m shares in First Uranium for CAD 4.60 each, to raise CAD 90.2m. 

Disclaimer

MINEWEB is an interactive publication, with rolling deadlines through each day, commencing in the Sydney morning,  and concluding, 24 hours later,  in the Vancouver evening.  If you believe your side of an issue deserves inclusion, but has failed to meet one of our deadlines, you are invited to notify the Editor in Chief in Johannesburg, and we will include you in our editing and expanding on our stories. Email him at alechogg@gmail.com

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